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Why Short Sale Can Benefit Buyers and Sellers

September 7, 2023

It’s a situation that is unfortunate but not uncommon: a homeowner so far behind on house payments that it’s impossible to get ahead. Rather than an appreciating asset, many property owners find that their property values are still less than their remaining mortgage balances even 10 years after the financial collapse.

Is a short sale the right answer for both the buyer and the seller?

What to consider with a short sale

For some homeowners in this position, a short sale auction may be the answer. In a short sale, the home is sold at a price lower than what is owed on a purchase loan as a preventative measure taken to avoid repossession. By releasing homeowners from a mountain of debt, it stops foreclosure activities. At the same time – unlike most traditional sales – the repairs and closing costs will most likely be covered by a buyer instead of a seller.

Short sales are also far less damaging to a borrower’s credit than foreclosure. While a short sale will drop a borrower’s credit score between 100 and 150 points, a foreclosure will drop the score between 250 and 280 points. A homeowner can particularly curtail the damage if he/she continues making mortgage payments until the short sale closes – and in some cases he/she will be able to obtain a new loan within as little as two years.

A short sale auction can turbo-charge the short sale process by bringing powerhouse marketing efforts and more buyers into the mix. The goal: the quickest sale at the highest price.

A variety of marketplaces exist to facilitate short sales

The blitz of nationwide marketing offers another advantage; while traditional listings tend to be marketed more locally or regionally, short sale auctions are advertised nationwide. Buyers are able to bid with more confidence now that they are aware the bank is already a part of the transaction and know the bid amount they are likely to accept. This is different from in the past, when buyers had no way of knowing whether their short sale offer was going to be accepted or not and how long it would take to receive a decision.

With buyers bidding in line with the current market, transparent auctions are designed to bring out true fair-market value for the seller. In addition, if there is already an offer on the table, the transparent nature of a short sale auction can validate its fair-market value. This in turn maximizes the amount of money likely received for a property. More than that, it also increases the chances that the bank will approve the short sale, since bids are more in line with market value.

Online auctions are also preferable to traditional short sale methods, which can take months. The average short sale takes between 60 and 90 days, the lengthiness in part dictated by the bank. In a standard short sale, approval is contingent on the bank coming to an agreement with buyers on the many costs that they would typically be responsible for, such as wire transfers and repair fees. Online auctions are far shorter – typically a matter of days.

Short sales are different than foreclosures—and that’s a good thing

The auction opens with an online bid price that may not be in line with market value. This is likely not the final sale price, since usually these start between 60% and 85% of the price a homeowner might be seeking. Starting at a lower bid draws more eyes to each property, ensuring healthy competition during a sale.

However, sellers do also have the right to keep the reserve price—the lowest price willing to be accepted—a secret. In the event that the reserve is not met, sellers do not have to sell the property. In order to determine the reserve, it’s important to consider comparable homes that have recently sold in your area with similar size, condition, and features.

During the bidding process, buyers compete against one another, with each bid higher than the last. Finally, the highest price is reached when no one is willing to outbid it, and the auction finalizes after the auction time period has expired.

Short sales and auctions can actually yield higher prices

Often, real estate auctions yield the highest offers on homes. Through Hubzu, a leading online real estate marketing platform, auctions were proven to yield the higher offer in nearly half of the transactions conducted through the platform. This is whenever there was already an offer on the table, which was presented to the servicer as the highest offer the market would bare. In these cases, Hubzu conducted a few quick auctions to either validate the original offer on the table or surpass it. Hubzu found that 49% of the time its auctions were able to produce a higher offer than the original offer, averaging an offer price of $19,000 higher.

The short sale auction process is a tri-party relationship between lender, borrower, and auction company – a structure that helps the flow of communication so that properties can get listed, marketed, and sold quickly.

While an online auction is a bit different than the “for sale” sign many homeowners envision when they first purchase a home, short sale auction are an efficient and proven way to allow homeowners to move on with their financial lives while offering buyers a better way to access properties around the country.

Interested in learning more about how to buy or sell a home via online auction? Learn more at Hubzu.